Macroeconomic objectives and policy conflicts
Key terms
Define each term.
Multiple choice
Circle the correct answer.
A country's unemployment rate falls from 8% to 7% while the number of people employed is unchanged. The most likely explanation is:
A government successfully raises economic growth. Which macroeconomic aim is most likely to be harmed as a result?
Worked problems
Show your working.
Calculating an unemployment rate from population data. A country has a population of 40 million. Of these, 24 million are in the labour force and 22.2 million are employed. Calculate the number unemployed and the unemployment rate. Then explain why the rate would fall if discouraged workers stopped looking for work.
Diagrams
Draw a production possibility curve with capital goods on one axis and consumer goods on the other. Mark two points, one with high consumer goods output and one with high capital goods output. Then sketch where each economy's PPC would sit several years later.
Answers
Macroeconomic aims: The main objectives a government pursues for the economy as a whole: economic growth, low unemployment, price stability, a stable balance of payments position and a fairer distribution of income.
B. If employment is unchanged, no new jobs have been created. The rate can only fall if the labour force shrinks, which happens when discouraged workers stop actively seeking work. The headline figure improves while the underlying position does not.
B. Rising incomes increase spending on imports as well as on domestic output, so the current account tends to deteriorate as growth rises. Unemployment usually improves alongside growth rather than conflicting with it, which is why those two aims are the pair that most often move together.
Step 1. Find the number unemployed. Unemployed = labour force - employed = 24.0m - 22.2m = 1.8 million.
Step 2. Apply the unemployment rate formula. Unemployment rate = (1.8 / 24.0) x 100 = 7.5%.
Step 3. Note what the denominator is. The rate is calculated against the labour force of 24 million, not the population of 40 million. Dividing by 40 million would give 4.5%, which is a common and heavily penalised error.
Step 4. Explain the discouraged worker effect. Someone who gives up looking for work leaves the labour force. Both the numerator and the denominator fall: unemployed becomes 1.7m and the labour force becomes 23.9m, giving 7.1%. The rate has improved while the number of people out of work is unchanged and the situation is arguably worse, since a discouraged worker is further from employment than an active jobseeker.
Step 4 is the point of the question. The unemployment rate can fall for a bad reason, which is why examiners like data-response questions that pair the rate with the participation rate or with total employment.
This is the growth-now-against-growth-later conflict in a single picture. The economy choosing more consumer goods enjoys higher living standards today but its curve shifts out less. The one choosing capital goods sacrifices present consumption for a larger curve later. Neither choice is wrong, which is exactly why it is a conflict rather than a mistake.